How to Create Climate Wealth Through Efficient Buildings
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RESEARCH REPORT RAISING THE ROOF: JU LY. 2013 Are Triad logo - HOW TO CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS THE CARBON WAR ROOM OPERATION LEAD: JOSHUA KAGAN SENIOR FElloW: MURAT ARMBRUSTER FElloW: SARA BARNOWSKI 02 HT OW O CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS Y. H P EOUL) S HOTOGRA P E CENTER, M O H HORNER EL D OHN : J AGE SUNG MO M I M , A S GE ( A P AA A D THIS NA Y TURE B C HITE C Y. AR Y. H P HOTOGRA P HORNER OHN : J AGE M I ER V O C Raising the Roof: How to Create Climate Wealth Through Efficient Buildings © Carbon War Room, 2013 This publication may be reproduced in whole or in part and in any form for educational or non-profit purposes without special permission from the copyright holder, provided acknowledgement of the source is made. No use of this publication may be made for resale or for any other commercial purpose whatsoever without express written consent from Carbon War Room. Please direct all inquiries to: Carbon War Room 1020 19th Street NW Suite 130 Washington, DC 20036 P / 202.717.8448 F / 202.318.4770 www.CarbonWarRoom.com Are Triad logo - Design: www.grahampeacedesign.com Images: John Horner Photography www.johnhornerphotography.com. WWW.CARBONWARROOM.COM CARBON WAR ROOM RESEARCH REPORT – 2013 03 Contents A LETTER TO OUR READERS 04 POLICY 44 45 What Role Does Policy Play? EXECUTIVE SUMMARY 06 48 Benchmarking and Disclosure Rules 07 Key Insights 48 Point-of-Sale Auditing INTRODUCTION 10 DEMAND AGGREGATION 50 11 Motivation 12 Transformational Impact LESSONS LEARNED 54 13 Benefits of Energy Efficiency 55 From Concept to Deployment: 14 Key Barriers A Progress Update on the PACE Commercial Consortium 14 What Has Been Done So Far? TECHNOLOGY 16 CONCLUSION 56 17 Assessing a Building’s Starting Position WORKS CITED 17 Recognizing the Challenges 58 18 Determining an Economic Model 55 Industry Resources 20 Step 1: Benchmarking 56 Whitepapers 21 Step 2: Auditing ACKNOWLEDGEMENTS 23 Step 3: Implementation 63 24 Step 4: Retrofit Implementation FINANCE 26 27 Energy Services Company (ESCO) 28 Efficiency Service Agreements (ESAs) 32 Third-Party On-Bill 35 Assessment Finance 43 Risk Mitigation WWW.CARBONWARROOM.COM 04 HT OW O CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS A Letter to Our Readers WWW.CARBONWARROOM.COM CARBON WAR ROOM RESEARCH REPORT – 2013 letteR 05 Amigas y Amigos, Climate change presents one of the greatest challenges in human history—a challenge that transcends national boundaries, income, ideology, race, and ethnicity. Overcoming that challenge will result in one of the greatest wealth creation opportunities ever—a modern industrial revolution that could radically reshape society and our planet. The world can no longer afford to be intimidated by the magnitude of the climate crisis, nor into believing that we must choose between economic prosperity and environmental security. The Carbon War Room takes a global, sector-based approach. Our mission is to accelerate the adoption of proven clean technologies and innovative business models in order to achieve profitable, gigaton-scale reductions of carbon emissions. One sector in which the Carbon War Room is actively engaged is Energy Efficiency in the Built Environment (EEBE)— a sector with an estimated market potential of $87 billion per year, and an equally substantial opportunity to reduce greenhouse gas emissions.1 In 2010, the Carbon War Room launched the Green Capital Global Challenge (GCGC) to help cities around the world use innovative mechanisms to support energy efficiency in their built environments, thereby bringing capital, energy technologies, and jobs to their citizens in a sustainable and profitable way. Having concluded the GCGC, we are now, with this paper, able to share the insights we gained over the course of that Challenge with cities and building management groups around the world. We hope that this information will be used to stimulate new initiatives or accelerate existing initiatives in readers’ own cities. This publication, “Raising the Roof: How to Create Climate Wealth Through Efficient Buildings”, is a collection of observed global best practices as they relate to finance, technology, and policy. Whether discussing San Francisco’s benchmarking ordinance, the UK’s Green Deal, or Melbourne’s 1200 Buildings program, this guide is meant to provide real estate owners, capital providers, entrepreneurs, and policy makers with a point of reference on how energy efficiency projects are currently working (or not) around the world. We also provide a selection of further resources to facilitate more in-depth research. Our work on energy efficiency continues as an active project at the Carbon War Room. Please stay or get in touch with us to let us know how we can help you. Best Regards, José María Figueres, President, Carbon War Room 1 Robins, Nick, Charanjit Singh, Robert Clover, Zoe Knight, and James Magness. “Sizing the Climate Economy.” Rep. N.p.: HSBC Global Research. 2010. WWW.CARBONWARROOM.COM 06 HT OW O CREATE CLIMATE WEALTH THROUGH EFFICIENT BUILDINGS Executive Summary WWW.CARBONWARROOM.COM CARBON WAR ROOM RESEARCH REPORT – 2013 EXECUTIVE SUMMARY 07 EXECUTIVE SUMMARY KEY INSIGHTS T he implementation of measures to achieve EEBE The Context (Energy Efficiency in the Built Environment)—whether on a building-by-building basis or in a portfolio • Emissions: Globally, buildings are responsible for 40 percent of energy 2 of buildings—is a multi-step process involving consumption and 33 percent of CO2e emissions. In the wealthier cities of the benchmarking, auditing, implementation, measurement industrialized world, most of that energy is used by residential and commercial and verification, and ongoing commissioning.W hile it buildings for lighting and temperature control.3 is generally accepted that most buildings leak energy, and that most asset owners leave money on the table • Market size: HSBC estimates that the total size of the current EEBE market is $87 by not undertaking efficiency retrofits, inertia is a billion per year today, and the potential market in 2020 to be $245 billion per powerful force, causing stakeholders to stick with the year.4 The US, China, France, Germany, and UK currently account for 75 percent status quo rather than enter the unchartered waters of the global EEBE market.5 McKinsey forecasts potential US savings of $1.2 of EEBE projects. Compounding that inertia is a trillion against an investment of $520 billion by 2020. Such savings represent a historical lack of private capital to finance retrofits, a reduction in energy consumption of 9.1 quadrillion BTUs, which would prevent “split-incentive” barrier, and a persistent uncertainty the release of 1.1 gigatons of CO2e emissions each year. as to whether substantial savings will actually be realized through energy efficiency upgrades. It is Key Barriers thus understandable why so few projects have been completed relative to EEBE’s potential to generate • Misaligned financial incentives: A significant “split-incentive” challenge exists savings. in buildings in which the landlord does not pay the energy bills of the property. Simply put, tenants are often unwilling and/or unable to incur the upfront Implementing EEBE projects offers a myriad of capital expenditures of implementing a retrofit, as they will not necessarily benefits, including, but not limited to, direct bill capitalize on those long-term savings. At the same time, building owners are savings, increased comfort, higher productivity, strong often unwilling to pay for efficiency measures given that they will not accrue a paybacks on investment, and the reduction of carbon short-term benefit from the resultant lower energy bills.T his split incentive is emissions. Any attempt to demystify and otherwise one of the single biggest obstacles to EEBE across sub-sector and geography. help to accelerate the EEBE industry is timely. In working with 30 global cities over the past three years, • Upfront capital costs: Comprehensive energy efficiency retrofits that result the Carbon War Room has found that the current in 20 percent or higher reductions in energy consumption often require a finance, technology, and policy conditions are sufficient substantial upfront investment. Building owners might not have the ability to to unlock hundreds of billions of dollars of capital finance the upfront capital expenditure. for EEBE projects across the world—the challenge is working out how to get it done quickly and on a large • Associated risk: Though upfront costs are a problem, large amounts of capital scale. are, in fact, currently available for EEBE programs. That capital is not being accessed because many types of EEBE investments and asset classes are new to the market, so the perceived risk associated with such investments is high. The risk can be mitigated, however, through more data, innovative insurance packages, and inserting credit enhancements into the financing structures. • Lack of information: Often, building owners lack the time, knowledge, and/ or the capacity to differentiate between substance and noise when it comes to the available retrofit opportunities. Many building owners are not aware of the data and reports illustrating that more efficient buildings result in higher tenant occupancy rates, lower operating expenses, and lower default rates. Many building owners are not aware of the data and reports illustrating that more efficient buildings result in higher tenant occupancy rates, lower operating Y. H expenses, and lower default rates. P • Legal/structural challenges: Many buildings have mortgage covenants in HOTOGRA place that prevent the incursion of further debt or changes to the structure P of the building without explicit consent of the lender. Furthermore, some buildings may be unable to incur additional debt due to their being owned 2 http://www.usgbc.org/DisplayPage.aspx?CMSPageID=2124 HORNER 3 as Special Purpose Vehicles (SPVs), which lack additional assets that could http://www.rrojasdatabank.info/statewc08093.4.pdf 4 http://earthscience.bcsdk12.org/earthscienceiscool/media/climatechange/ serve as collateral.